While budgeting might sound like a routine process to business owners, a bad budget and the lack of effective structuring are among the most common causes of business failure. A lousy financial plan can quickly spiral into cash flow issues, which then compound into numerous functional problems such as the lack of procurement and the inability to maintain supply chains.
However, it first becomes imperative to understand what constitutes a proper budget, and how a small business can take an effective and realistic approach when configuring the same. Budgets will also be determined by your business goals and the various aspects of your operations. The subsequent sections detail the factors that constitute a foolproof budget and a few simple steps on how you can design your budget to achieve your ambitions efficiently.
What Makes a Good Budget?
Good budgets are realistic and take into account real-world factors that affect your business. They also require accounting for numerous moving parts in your operations and include emergency reserves to help you manage your business on a rainy day. The below factors detail the aspects of an effective budget and can help you build a business that sees success using tangible financial planning strategies:
Expense Planning and Forecasting
All-round expense planning and forecasting are crucial to the budgeting process. Ensure you include even the smallest of details when you’re summing up your fixed and variable expenses. Differentiating between the two in this exercise is imperative. While these remain the overarching categories of expenses, you should also consider classifying your expenses based on the operations undertaken by your business. Chart expenses based on operational costs, marketing & advertising expenses, labor costs, and capital expenditures.
Accurate Revenue Estimations
Identifying & quantifying the sources and the value of the revenue generated by the business is another quintessential aspect of a sound budget. By referring to past business performance, trends, market variables, and overall economic outlook, business owners can predict the revenue their operations are expected to generate. This will give owners a better idea of what to expect concerning cash flow.
Grounded Profit Margin Calculations
Several businesses tend to overestimate their profit margins, often leading to critical errors and budgetary mismanagement. Core factors such as the selling price, operating expenses, and emergency costs will need to be accurately accounted for before charting an expected profit margin for the business. Entrepreneurs must remain dedicated to improving their margins on goods sold while cutting down costs.
All small business owners must set aside reserve funds to help buttress any cost overruns incurred in their budgets. Effective plans have a percentage of the total expenses set aside for emergency expenditures. Given the several factors involved in business operations, your company might require seamless cash flow at any given moment. Ensure a corpus of capital is always maintained to help your business remain unfazed in times of sudden expenses or economic downturns.
Constant Monitoring & Flexibility
Efficient budgets need to be flexible enough to ensure the vagaries of the market are constantly accounted for. Alongside this factor, the lack of monitoring can also lead to operational cash flow problems for your business. Markets can become quickly volatile and without constant monitoring and adjustment, your budget can become an outdated plan for the new sets of variables faced by your firm.
How to Create a Business Budget
The creation of a budget might involve numerous steps unique to the nature of your operations and the type of business you run. However, several generals, yet important tips on creating budgets include:
Evaluate Your Business Goals
A business’ budget is impacted directly by organizational aspirations. Your firm’s budget must be reflective of what your business intends on achieving. If you’re planning on launching a new product, focusing your budgeting activities around marketing the new product might be a wise choice. Similarly, if your business has witnessed rising expenses, your budget must be structured around mitigating and cutting costs to ensure you run a more cost-efficient business.
Start with a Spreadsheet
Create a detailed spreadsheet that lists your business expenses, income sources corresponding with value and your estimated profits. Use the spreadsheet to maintain granular data on all of these core components. Ensure updates to this sheet are made frequently as and when you notice changes in the market so your budget is adaptable enough to weather economic instability. Based on the extent of your business expenses and sources of income, you might have to create multiple spreadsheets to ensure confusion is kept at bay.
Work with Budget Targets
Upon creating a detailed sheet with the various categories of expenses incurred by your budget, it is equally important to denote how much you intend on spending on a particular component of your business operations. For example, if you have set aside $5,000 for marketing expenses, you might indicate that your actual spending goal on marketing activities is $3,000. Keeping your budgetary goals well within the respective funds assigned is ideal for efficient cash flow management. In the case of goods and their suppliers, you can also implement efficient ways to manage cash flow through procurement for your business.
Tally Income Sources
It’s important to list out and evaluate all of your sources of income and assign accurate values to each of them. As a business, you might earn income through investments, sales, royalties, grants, and rebates. Ensure all of these sources are explicitly mentioned in your budget along with accurate values to promote better charting and estimations for future periods.
Track Budget Deficits & Surpluses
Upon analyzing your sources of income and expected expenses, you’re likely to arrive at either a budgetary deficit or surplus. In case you’re expecting a deficit, look to cut costs wherever possible, or utilize your budget more efficiently to meet your budgetary targets. Contrarily, if you estimate a budget surplus, it is ideal to move the surplus funds into the emergency corpus to ensure you have access to a larger source of contingency funds for volatile periods.
Using the above steps and factors that influence a good business budget, you can structure your own business’ financial strategy to ensure you see the profits you expect from your enterprise. Moreover, structuring an efficient budget also helps you build a competent business that looks to save money while maximizing revenue.